For investors, the natural gas market seems loaded with opportunity. Energy demand is increasing around the world, and the U.S. appears to have a stranglehold on a clean, cheap resource.
Because of oversupply and plummeting prices, however, investors should look beyond the traditional exploration and production companies. Forget about predicting a price bottom, analyzing reserves, and calculating break-even points. To tap into this potentially lucrative commodity, focus on the lesser-known suppliers and the companies making huge investments that will pay off in the long run.
An all-in wager by production companies
Before betting on the future of natural gas, investors need a primer on the past. In recent years, natural gas interest surged as drilling techniques exposed the huge deposits found in U.S. shale formations. Production companies arrived at the scene and kicked off the so-called "natural gas revolution." A revolution, for all intents and purposes, that was supposed to deliver huge profits.
Years later, those profits have been slow to materialize. In a classic lesson of Economics 101, the surging interest in natural gas drove supply upward, and prices downward. Natural gas now trades around $2.60 per million BTUs, 45% below the year-ago price.
Unsurprisingly, the new commodity on the block has lost some of its allure.
Earlier this year, the second-largest producer, Chesapeake Energy
Southwestern's CEO, Steven Mueller, noted that reductions in the capital budget would occur if the oversupply continued in the years ahead. In Mueller's words, "The rig count on the gas side has been dropping like a rock."
Over time, production will slow down, and weak operators will abandon their natural gas rigs. Prices should recover, but will investors have the patience?
Hidden value in suppliers
Instead of betting on a natural gas rebound, investors can find value in an under-the-radar oil and gas equipment supplier. After all, the extraction of hydrocarbons from the earth will continue in the foreseeable future, whether the underlying resource is a liquid or a gas.
Rig operators like Helmerich & Payne
Helmerich's shares look inexpensive when you consider the current trading price of 11 times forward earnings. Furthermore, the company has a low debt-to-equity ratio of 0.7, despite substantial investments in rig construction over the past few years. Helmerich's strong competitive position and reasonable share price make it an attractive energy stock in my book.
A promising outlook for natural gas transport
While the price ratio between oil and gas has grown dramatically (it's currently 40 to 1!), new markets for the gaseous fuel will cause this discrepancy to shrink over time.
One company paving the way to a natural gas future is Westport Innovations
On top of a remarkable year for Westport in 2011, the company should get a boost due to President Obama's recent endorsement of natural gas transportation. The president announced a proposed tax break for natural gas-powered trucks that could jump-start mass production, stimulate spending on necessary infrastructure, and hopefully, ultimately, create new jobs.
Will the proposed tax break serve as a catalyst for Wesport's share price? Only time will tell, but I remain bullish. Westport currently stands on the forefront of alternative energy (the company has very few notable competitors) and thus generates consistent revenue growth of over 30% year after year. An uptick in demand for Westport's engines should pay off in substantial profits down the road.
A long-term bet on exports
The shale gas boom has burdened producers with excess supply in the U.S., so delivering natural gas to foreign markets seems like a logical solution. Prices remain high in many overseas markets, but the problem is the lack of domestic infrastructure.
On this front, Cheniere Energy
The natural gas industry currently offers something for everyone. My suggestion is to find the companies with minimal exposure to the huge price swings of the underlying commodity. Thorough research will reveal the undervalued suppliers and cutting-edge companies that could prosper for decades to come.
Besides the companies mentioned above, I recently came across a leading equipment manufacturer that will benefit from the oil and gas boom. Feel free to learn more about this thriving company by reading "The Only Energy Stock You'll Ever Need." Click here to find out why our analysts believe this company has "growth prospects rich as Texas tea."